In a response to recent criticism regarding the Help to Buy ISA, the government will introduce a new savings scheme from April 2017 called the Lifetime ISA (LISA). Unlike the current Help to Buy ISA, savers will be able to use all of their savings plus the bonus they receive to pay towards a deposit for a new home.
Criticism of the Help to Buy ISA came when it was shown that the 25% bonus savers received couldn’t be used for a deposit because the bonus was only paid after the purchase of the new house had been completed. Now, homebuyers will be able to use their bonus money for a deposit when contracts are initially exchanged on any property that is worth up to £450,000. The Treasury has also agreed to allow current Help to Buy ISA savers to transfer their present savings into the new LISA from April 2017. Danny Cox, financial chartered planner at Hargreaves Lansdown, said the change would help “the cash flow of first-time buyers so the cash would be ready when it was needed.”
Any money that is deposited into a LISA can’t be used for at least 12 months after the account has opened. So homebuyers are advised to take into consideration the time when they can use their money for buying a new home. For the first year, bonuses will be paid annually but from April 2018 they will be paid monthly. Savers can also have a LISA and a Help to Buy ISA at the same time and pay into both in the same tax year as long as they only use the government bonus from one of the savings accounts to buy their new home.
Previously, the government had claimed it couldn’t allow the bonus from the Help to Buy ISA to be used for a deposit in case savers claimed the bonus money and then didn’t go on to buy a house. However, it appears to have backtracked on this.
A Treasury spokesman said: “In order to protect government funds, if the purchase of the new home isn’t completed within 90 days, then the conveyancer must return the funds to the provider. Failure to do this will result in a 25% charge, which the HMRC has the power to recover.”
As with the Help to Buy ISA, the new LISA lets future new homebuyers save up to £200 a month. They must be first-time buyers and put £1,200 into the account to begin with. The government then gives a bonus of 25%, £1 for every £4, on savings up to a maximum of £12,000 which gives a bonus of £3,000. Anyone who is aged between 18 and 40 will be able to open up a LISA.
If a saver decides to use the LISA savings for something other than buying a new house, or before they reach the age of 60, they lose the 25% bonus as well as receive a 5% financial penalty unless there are exceptional circumstances such as a terminal illness. The change from April 2018 meaning the bonus is paid monthly instead of annually also allows savers to benefit from compound interest.
Cox thinks the new LISA will prove to be popular with current Help to Buy ISA holders: “We expect there will be a lot of interest from Help to Buy ISA savers looking to transfer their savings into the new independent savings account.”
It’s thought there are currently around 500,000 holders of Help to Buy ISAs in the UK.